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International trade may also play a role, indirectly, in the rise of the top 1 percent share of the income distribution. Together with technological change, international trade enables those who are recognized as best in their field to sell their services and ideas to larger, global markets. If you are a top hedge fund manager, pop star, lawyer, or football player, technology can be used to codify and digitize your services, making it possible for you to sell what you do throughout the world. If you create a new search engine, social media network, or computing device, your profits expand dramatically if you can sell to a worldwide customer base. This creates outsized gains for those with the most unique human capital and the most entrepreneurial initiative, as well as those that are simply lucky. But paying these extraordinary returns to the “winners” in the world economy squeezes the returns for those with more common skills and less luck, as discussed in Chapter 2.
Harmful Effects on Wages and Workers: The Evidence
Job losses, particularly in the manufacturing sector, are undoubtedly difficult for workers, and evidence from the economics literature helps us understand why. Typically, manufacturing workers are both older and less educated than workers in other sectors, and this make job loss especially painful, since finding new jobs at similar wages is harder for older and less-educated workers. There is some evidence that workers in sectors with more import competition have both lower reemployment rates after job losses and greater earnings losses when they do find new jobs.3 However, since domestic competition and technological change can also reduce manufacturing employment, it is difficult to pin down the precise degree to which manufacturing job losses can be attributed to increased imports.
Recently, a flurry of important studies have focused on quantifying the contribution of trade shocks to manufacturing job loss. For example, David Autor and his coauthors find that those commuting zones (clusters of counties that together constitute labor markets) where trade with China has increased most are the same zones in which job losses have been largest and wage growth has been most anemic.4 They conclude that the shock associated with Chinese trade is large. Chinese imports account for about 1 million of the 5.8 million (net) job losses in manufacturing over the period 1999 to 2011—and if indirect effects on other industries are included, the number of job losses attributable to trade with China is twice as large.5
As it turns out, these intense “China shock” zones overlap heavily with the voting precincts that most heavily favored Donald Trump in the 2016 US presidential election. This election followed a long campaign season in which Trump (and Bernie Sanders, competing for the Democrats’ nomination) frequently lambasted Hillary Clinton for promoting international trade through such agreements as the North American Free Trade Act (NAFTA)—given her affiliation with former President Clinton, who brought NAFTA into force in 1994—and the Trans-Pacific Partnership (TPP), negotiated by the Obama administration she served as Secretary of State. It appears that voters in locales where trade most harmed workers expressed their pain by voting for the candidate who promised trade restrictions and renegotiations of trade agreements. People often respond to harmful economic outcomes by seeking out polarized political positions, abandoning moderate politicians and parties.
Figure 4.1: Areas of the United States Most Affected by the “China Shock”
Notes: Darker shading indicates more affected areas. Maps and research from the Autor, Dorn, and Hanson team are available at http://chinashock.info/. Reprinted with Permission from Dow Jones and Company, Inc.
Debating the China Shock
David Autor and his coauthors have made a small cottage industry of work researching the China trade shock, publishing many papers on the topic that emphasize the large magnitude of these harmful shocks.1 Still, the question is not entirely settled. Scholars have pointed out that findings regarding the China shock’s impact on employment may be sensitive to how the data are organized and whether adequate control variables were included.2 There are also important concerns as to whether the effects of the Great Recession might cloud the effects of the China shock. And many question whether it is valid to add up every commuting zone that lost jobs to the China shock and describe that sum as the total effect of the China shock. For example, job losses due to trade likely caused policy-makers at the Central Bank to pursue looser monetary policy as a result, expanding employment elsewhere in the economy.3
Meanwhile, even as job losses result from imports there may be job gains due to exports in other parts of the economy; that is, manufacturing job losses may be offset by job creation in agriculture or services.4 Evidence suggests that companies (but not individual plants) that were more exposed to competition from China actually increased US employment. Lower Chinese input costs allowed greater competitiveness in areas that were complementary to those imported inputs. Some companies also reorganized their business activity to focus on areas that were less exposed to Chinese competition.5 In short, adding up job losses due to the shock of an influx of Chinese imports captures only one part of the employment effects of trade. Like trade in general, the “China shock” is more likely to redistribute jobs than to change the total number of jobs.
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1. These authors have a handy website that puts all the papers in one place: http://chinashock.info/. The site includes interactive graphics. Other important papers in this group include David Autor, David Dorn, and Gordon H. Hanson, “The China Syndrome: Local Labor Market Effects of Import Competition in the United States,” The American Economic Review 103:6 (2013): 2121–2168; David Autor, David Dorn, Gordon Hanson, and Kaveh Majlesi, “Importing Political Polarization? The Electoral Consequences of Rising Trade Exposure,” Working Paper 22637, NBER Working Papers, National Bureau of Economic Research, 2016.
2. See “Economists Argue about the Impact of Chinese Imports on America,” Economist, March 11, 2017; Robert C. Feenstra, Hong Ma, and Yuan Xu, “The China Syndrome: Local Labor Market Effects of Import Competition in the United States: Comment,” UC Davis, 2017; David Autor, David Dorn, and Gordon H, Hanson, “Response to Robert Feenstra, Hong Ma, and Yuan Xu’s Comment on Autor, Dorn, and Hanson,” MIT, 2017.
3. See similar arguments with Paul Krugman, “Trade and Jobs: A Note,” Blog, Opinion: New York Times, July 3, 2016.
4. See Robert C. Feenstra, Hong Ma, and Yuan Xu, “US Exports and Employment,” UC Davis, 2017.
5. See Ildiko Magyari, “Reorganization, Chinese Imports, and US Manufacturing Employment,” Columbia University Working Paper, January 2017.
Recent research reveals that the response to Trump’s anti–Trade stance isn’t an anomaly.6 Well before his election, in the first decade of this century, areas of the United States that imported relatively high volumes of Chinese goods disproportionately voted moderate representatives out of office, in favor of ideologically extreme candidates of both parties. A consequence of economic disruption may be an increase in political polarization.
Political rhetoric, however, does not only respond to public opinion; it also drives it. Across the campaign season leading up to the 2016 election, opinion polls revealed big declines in the popularity of trade and trade agreements, despite the fact that wage growth that year was higher than in other recent years. Before the 2016 election, 58 percent of Americans described trade as a good thing, and only 33 percent labeled it as a bad thing. But by October 2016, those numbers had shifted to 45 percent saying good and 43 percent saying bad.7
The evidence that recent trade with China has had harmful effects on workers is important. Still, it is also worth considering the larger body of evidence on this question over the previous decades. Over the period that income inequality has been increasing, most research shows that trade has not been the primary cause of harmful labor-market results and inequality. Most economists put a larger share of the blame on technology, another important causal factor that works to increase demand for higher-income workers relative to lower-income worker
s.
Economists have spent decades bickering over whether trade or technology is responsible for the slow wage growth of American workers. Early studies produced three findings that appeared to absolve trade from responsibility: trade increased most in the 1970s, whereas wage stagnation and major upticks in income inequality occurred later; all industries showed growing use of skilled labor relative to unskilled labor, indicating that skill-biased technological change was a likely culprit; and the volume of imports looked insufficient to generate the large outcomes observed in labor markets (as documented in Chapter 2). China’s emerging role in trade has challenged that earlier consensus, and the arguments among economists about the magnitude and importance of these findings continue. In the end, however, the preponderance of evidence suggests that international trade has had far less impact than technological change.
Further, it is important to remember that a great deal of economic disruption happens on an ongoing basis due to competition that is not international but rather domestic. In market economies, companies drive competitors out of business, new industries are born, and obsolete ones die.
Few companies today produce horse carriages, typewriters, or vacuum tubes; these products were displaced by automobiles, computers, and semiconductors. Large, big-box retail chains displace mom-and-pop stores, as customers appear to opt for lower prices over neighborly interactions. People stream their entertainment instead of hooking up cable TV boxes. Fancy coffee shops get sprinkled all over the country, while old-fashioned diners fade away. This creative destruction always generates a lot of job loss and job creation. In fact, in the American economy, a single quarter typically sees over six million jobs created and six million destroyed.
Figure 4.2: Job Creation and Destruction, 2006–2016
Note: The figure shows the US total nonfarm employment series. Data source: US Bureau of Labor Statistics.
This dynamic job creation and destruction is a result of capitalism itself, as new industries replace old industries, and competition (often domestic) causes some companies to expand as others contract. While such churn is disruptive, it is part of the process of reallocating labor to where it will be most productive.
Foreigners or Robots?
It is difficult to disentangle the effects of international trade from the effects of technological change, since both “foreigners” and “robots” bring substantial changes to labor markets.8 Over the same period that international trade has grown, the economy has also experienced dramatic changes due to technological change, computerization, and the Internet. Back in 1980, few people or businesses regularly used computers, and no one relied on web pages, smart phones, and so forth.
It is amusing to describe to my students the technologies of my own college days. Thirty years ago, when I took my first economics course, I typed my papers on a typewriter. I used a pen to write letters on paper to my parents, which were delivered by the US Postal Service. I might have wanted to call a friend studying abroad, but it was prohibitively expensive; a single call could easily consume the monthly budget of a college student. If I needed the services of a business, I consulted a directory called the “yellow pages.” Information on foreign economies was scarce. I found what I could in dusty volumes in the library, and entered the data manually into large and confusing computers; the cursor blinked in green against a dark screen, awaiting my commands.
Computers have since transformed all our lives. International phone calls, and even video chat sessions, are free to anyone with Internet access. Email makes communication nearly instantaneous throughout the planet. Information from foreign sources is a click away. Computers are friendly, and small, and computing power is staggeringly cheap. A college student’s laptop has more computing power available than a Fortune 500 firm’s supercomputer did a generation ago. A 1980s supercomputer (for example, the Cray supercomputer, costing over $20 million in today’s dollars) was room-sized and had speeds inferior to today’s iPhone.9
In the course of one generation, workplaces have been transformed almost beyond recognition; automation and computing have had dramatic effects on manufacturing jobs. As technology has spread and become less expensive, each manufacturing worker can produce a far larger quantity of goods. Since 1987, manufacturing output has increased by 83 percent, even as manufacturing employment has fallen by 29 percent.
Figure 4.3: Manufacturing Output Increases as Manufacturing Employment Falls
Numbers are indexed such that 2009 = 100. Data source: Federal Reserve.
Studies suggest that one result of this technological change has been to dramatically reduce the number of workers required in manufacturing in the United States. Technological change has swamped the effects of international trade; according to one study, 88 percent of manufacturing job losses are due to technological change.10 More casual evidence also suggests that manufacturing in the United States is becoming increasingly automated. In a high-profile announcement in early 2017, for example, Ford Motor Company stated that it would add manufacturing jobs in suburban Detroit as part of its development of self-driving and electric vehicles. An analyst at the Center for Automotive Research noted: “Keeping a new technology near the engineers is an important thing, at least in the first generation.” More broadly, he observed, “Each iteration of a facility becomes less like old-school manufacturing and more high-tech. That will ultimately mean fewer jobs.”11
The decline of manufacturing jobs is nothing new. Over the past half-century, the manufacturing share of total US employment has declined at a notably steady rate. Technological change and structural changes in the economy would seem to be more important than trade shocks in driving this reduction in manufacturing jobs, since trade shocks were far from evenly distributed over this time period.
While technological progress in the past has been disruptive, it has not caused a reduction in the total number of jobs or a higher unemployment rate. There have been many technological revolutions that have ultimately enabled higher standards of living and greater opportunities for workers, starting with the agricultural revolution that dramatically increased farm output per worker and freed labor to move to the cities, and later including revolutions in industrial processes like the assembly line. When work can be done more efficiently, that doesn’t mean that the number of jobs has to fall, though jobs will be redirected. Two centuries ago, over three-quarters of the labor force worked on farms, whereas now less than 2 percent of the labor force works on farms.12 Yet as agricultural productivity increased, that did not leave would-be farmers unemployed, since they could turn to job opportunities in the cities.
Figure 4.4: US Manufacturing Employment Has Declined Steadily for Over Fifty Years
Note: This series shows the US manufacturing share of nonfarm employment. Data source: Federal Reserve.
Productivity growth in agriculture provided many gains. In 1960, Americans spent one-fifth of their incomes on food and did the vast majority of food preparation at home. Now, about one-twelfth of income is spent on food, and this includes expenditures on food preparation that used to be done (without pay) within the home.13 Growth in manufacturing productivity similarly means that less of our hard work is needed to purchase most manufactured goods, such as cars, clothing, and furniture.
Yet, the technology revolution of recent decades still presents a problem. It is not that it has reduced the number of jobs, but rather that it has systematically moved demand for labor away from some kinds of workers (those that can be replaced by computers and robots) and toward others (those whom computers and robots make more productive). Those who are displaced by computers are different from those who are helped by them. For instance, bank tellers, gas station attendants, secretaries, and factory workers have been replaced by ATMs, swipe-and-go self-service, computer typing and voicemail, and more mechanized factories. But engineers, software designers, scientists, movie stars, and financial managers are more productive, since they have computers to assist them in their endeavors. C
omputers make some workers more valuable, but they harm others, and those workers tend to be less well-off.
There are also concerns that the newest wave of technological change may have larger consequences for labor markets than prior technological revolutions, consigning a larger share of the working population to be “replaced” rather than “supported”. Computers may now threaten job prospects on a much larger scale than before due to their ability to replace labor not just in terms of muscle effort, but also in terms of thinking and analytical ability. Regardless of whether artificial intelligence and other new forms of computing turn out to be truly distinct, continued technological innovations are likely to exacerbate trends of increasing income inequality.
Robots Abroad
As noted in Chapter 2, these troubling labor-market trends are not confined to the United States, or even to rich countries. Indeed, the fact that developing countries also experience these problems should give pause to those inclined to blame all rich-country troubles on international trade. If trade is reducing demand for US labor, it should be increasing demand for Chinese labor, and in turn increasing the labor share of income and reducing economic inequality in China.
The Race between Education and Technology
At the start of the twentieth century, the payoffs for high school and college completion were large. For example, young GE recruits in the 1920s were required to have a working knowledge of algebra, mechanical drawing, geometry, plane trigonometry, elementary physics, and practical electricity. From 1890 to 1970, US workers increasingly rose to the challenge, and educational attainment outran technological progress, creating a surplus of highly educated workers. In recent decades, that surplus has flipped to deficit, as students find themselves increasingly unprepared for a workplace saturated with modern technology. The spiraling costs of college are one reason why fewer people have gained the critical skills demanded by today’s marketplace.1